Lloyds sees sharp drop in share price

| January 20, 2009 | 0 Comments
Lloyds sees sharp drop in share price

Lloyds Banking Group (LLOY) has seen its share price plummet over the past hour, falling from an opening of 70.5p per share to 38p at the time of reporting - a drop of almost 40%.

While yesterday’s announcement of further help for the bank sector has yet to be scrutinised by investors, the plans underlined the government’s intention to ensure the UK’s major banks were capitalised and backed in full.

However, yesterday also saw the ending of the FSA’s ban on short-selling, and no doubt there will be speculation that short-sellers are leveraging already bearish investor sentiment into a larger panic, in order to recoup some profit in difficult markets.

In the meantime, Barclays (BARC) has seen its share price slide 15% to 73pence per share - valuing the bank by market cap at £6.1 billion - only marginally higher than the £5.3 billion in profits Barclays says it is expected to announce for 2008.

While institutional investors may fear full nationalisation of Lloyds and RBS, the UK government is unlikely to push on such plans excepting as a last resort.

The government has already announced unprecedented backing to the banks in terms of capitalisation and asset protection.

The last thing Gordon Brown will want to do is fully nationalise RBS or any other bank, because in doing so this would bring the bank’s entire portfolio of toxic loans directly into the national debt. Additionally, it would cause unprecedented damage to confidence in the banking sector and escalate the problem.

In the meantime, while investors may be panicking about their holdings in Lloyds and other UK banks, it is difficult to see such behaviour as justified while the banks retain the financial backing of Her Majesty’s Government.

The fall in share prices will be worrying though, not least because it shows that the government may have further steps to take in assuring investors that full nationalisation is not an option.

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